Relationship between IMF and the World Bank

The International Monetary Fund (IMF) is a multilateral/international organisation whose main goal is to act as a lender of last resort for member states. Suppose one of its member nations is experiencing or about to experience a financial, banking, or related crisis. In that case, the IMF is there to lend money to that country’s government to end the crisis and get it back on its feet. It also provides technical support, publishes research and expertise, and monitors and surveys the global financial system’s health and stability and the economic health of its members.

International Monetary Fund

The International Monetary Fund (IMF) is what its name implies: a group of countries that pool money to work together to achieve their economic goals. As a result, the IMF’s actions are determined by the current circumstances and the level of economic thinking among the nation’s elites, who own it as shareholders. The largest contributions have the most influence over the fund’s decisions. The IMF has been criticized for this system of allocating votes. Economic crises are usually the most pressing issues that need to be addressed. The concerns are initially considered a repeat of the Great Depression and the breakdown of the fixed exchange rate system. As a result, the fund was more inclined to lend and trusted governments.

Since the 1970s, inflation has been a major concern, followed by the disruption caused by sovereign default. The IMF concentrated on assisting nations in financial distress and its structural adjustment program, which is thought to help economies expand faster and have fewer debt problems. It sees the money it provides as a significant incentive for governments to adhere to the reform program. However, there has been substantial debate about whether the IMF is pushing the correct changes and whether such a plan should even exist in the first place.

Establishment of the World Bank

The establishment of the World Bank was done to assist developing countries in their economic development by providing finance, guidance, and research. The world bank primarily serves as a development bank that assists middle- and low-income nations in their efforts to combat poverty.

The World Bank lends money to developing countries to help fund development projects and encourage policy reforms that its staff believes are necessary to promote faster and more inclusive economic growth and improvements in social sectors like education, health, and water and sanitation systems. In many situations, the World Bank loans on the condition that the borrowing nation’s government implements such policy reforms, arguing that such reforms are required to achieve the loan’s goal while also assisting the borrowing country in generating more resources to repay the loan.

Similarly, the bank will frequently place policy restrictions on loans to nations whose economies have entered a state of crisis, based on the notion that getting out of the crisis (and avoiding future crises) necessitates the implementation of better policies. Those loans may be given on near-commercial conditions or concessional terms, with near-zero interest rates and an extended grace period, depending on the borrowing country’s income level.

Differences between the World Bank and the International Monetary Fund

The World Bank loans money to most of its member nations every year, but the IMF seldom provides money to a country. For example, India borrows billions of dollars from the World Bank each year but has not borrowed money from the IMF in almost 30 years and has no plans to do so.

The international monetary fund only lends money to nations during a significant economic downturn. One of the most striking aspects of this crisis is that the country has run out of currency or is on the verge of doing so. There isn’t enough money to pay for imports and repay previous debts. At this time, the IMF will give a rescue loan if the government agrees to reform several of its economic policies. Because these changes affect many individuals, they are typically difficult to execute. So this is why governments avoid borrowing from the IMF until they have no other choice.

The World Bank gives loans to help economies grow. China, like India, borrows money from the World Bank every year. Poorer nations pay near-zero interest rates, while India and China pay rates much below the market. The World Bank may also request policy adjustments from time to time.

Conclusion

The IMF appears to be steadily shifting again in recent years, becoming more worried about unemployment and less interested in its earlier reform goal. So, this is based on the work of staff economists who have taken into account the criticism the fund has received over the years. In previous recent examples, the IMF has been far more inclined to promote debt forgiveness and lend more than the other members of the Greek troika. Another shift is that the fund used to advocate for currency boards but now advises nations in distress to float their currencies.